How to Manage Accounts Payable Effectively?
- 05 Sep 2022
- 3 minutes read
Once your business starts producing goods or providing services to people, you need to maintain a constant flow of raw materials and other products within your business premises. You often don't pay upfront for these materials, products, furniture, etc. It is a common practice for a business to have some payable accounts.
It is not wrong to procure raw materials or other bi-products using a credit note. But, it is your responsibility to pay the vendor within the time frame here has given you for clearing the credit note. Some vendors start charging interest or penalties once the payment date is passed. You need to ensure that your payroll team is vigilant enough to clear all the payable accounts on time; otherwise, the business will suffer losses because of these penalties.
Not only monetarily loss, but any negligence made with respect to payable accounts may adversely affect the client-vendor relationship. There are some cases where the vendor has refused to supply materials as the previous bills were not cleared. There are some Industries where certain materials are very uniquely available, and there are only a handful of vendors for them. If the vendor refuses to provide you with material on time, your operations may fail, and you might end up suffering cyclic losses.
To avoid such major problems that may lead to the shutting down of your business, you don't need to do anything much. The simple solution to all this is to make all the pending payments on time and manage the payable account effectively. If you are too clueless about managing payable accounts, keep calm and read below to know more about managing payable accounts.
Table of Contents
How to Manage Accounts Payable Effectively?
1. Go for paperless procedures and automated solutions
Most of the manual processes need a lot of time and money, yet they are subjected to human error. One must try to automate the time taking procedures and use paperless methods for invoicing and recording payments. This ensures that the cloud saves a copy of the receipt and that no loss due to negligence occurs.
2. Sort invoices according to their priority
Each vendor has a different payment policy. According to the vendor's payment policy and the product's timeline, an accountant must sort all the invoices according to priority. Vendors who charge interest of penalty on late payment must be paid on a high priority basis.
3. Align your working methodology
Invoicing and payment processes can be delayed if the workflow is very complicated and there are paper invoices toggling from one desk to another. One can save a lot of time by centralising the process and automating the workflow by establishing a linear channel of approval for payments.
4. Set up goals and KPIs to measure the bar
You do not see the difference until you can measure the difference. Hence, if you have made any amendments to your workflow, set up specific goals and establish KPIs to measure the difference once you automate any process. The standard metrics you may consider include:
- Cost per invoice
- Payment accuracy rate
- Days Payable Outstanding (DPO)
- Number of invoices cleared on or before the due date
- Early payment discount capture rate.
- Amount of time spent on resolving supplier disputes
5. Implement fraud detection measures
Since you are moving paperless and automating your payment procedures, you need to ensure that you have a proper cybersecurity channel to avoid fraud. Nowadays, many crimes are being reported, especially when payment software comes with any glitch.
6. Add checks to restrict redundant payments
You must record each payment made to a vendor very carefully with the invoice number, payment date and the amount. Your software system should make sure that no redundant payments are made. This can be done by proper numbering and having a centralised database of all the invoices. Each vendor should be assigned a unique vendor ID, and each payment must be recorded under that ID.
7. Adding access control measures
You need to make sure that only a handful of people have access to the payable accounts and payment methods. If more than the required number of people are there will be higher chances of error and ambiguity in the process.
8. Effectively tracking system
Streamlining dispute tracking and resolution assists you in maintaining a cordial relationship with the suppliers. On the other hand, prosecution disputes can lead to the identification of consistently struggling suppliers and prompt the search for substitutes.
After reading the tips mentioned earlier, we know that you must have a clear picture of managing the payable account efficiently to ensure that your business has a healthy financial structure and a good reputation in the market. The business owner needs to establish an uninterrupted channel with the help of the payroll and accounts team.
If you feel that the payments are being delayed and you cannot manage the accounts yourself, you may hire an accountant solely responsible for managing the accounts payable. You may even consider hiring a remote accountant or outsourcing accounting to deal with these issues.